Turkey hikes interest rate again to 45% after inflation nears 65%

https://www.cnbc.com/2024/01/25/turkey-hikes-interest-rate-again-to-45percent-as-inflation-remains-stubbornly-high.html

by mfiguiere • 2 years ago

65 78 2 years ago

So...real interest rates are -20%. That's not going to tame inflation.

I wish more laypeople understood the difference between real and nominal economic quantities. Until real rates go positive, it's profitable to borrow lots of money and use it to hoard goods, which accelerates inflation.

rightbyte2• 2 years ago

The numbers are too big for using that approximation.

Wont the real interest be: 1.45/1.65 => -12%

nostrademons3• 2 years ago

Pretty sure it's not an approximation, at least for interest rates compounded continuously. The real interest rate is simply the nominal interest rate minus inflation. The algebra is

e^(realt) = e^(nominalt) / e^(inflationt). Left side is your compounded real gains, first factor is on the right is your compounded nominal gains, and the divisor is the cumulative price rise to go from nominal to real terms.

e^(real t) = e^(nominalt - inflationt), by quotient rule for exponents.

e^(real * t) = e^(t * (nominal - inflation)), factoring out t.

real * t = t * (nominal - inflation), taking natural log of both sides

real = nominal - inflation, dividing by t

Workaccount22• 2 years ago

Turkey is trying to modulate inflation, not tame it. The goal is to attract foreign manufacturers to come an set up shop in Turkey. It's very favorable to be using $USD/$EUR to buy labor/material in Turkey right now.

Turkey however doesn't exactly have the stability, skills, or logistics necessary right now for big names to relocate. So they are likely suffering for not much gain.

Alpha30312• 2 years ago

It's possible to manage a dirty float without setting fire to the domestic economy, you know... In fact, investors tend to be hesitant to invest in economies that are on fire even with favourable exchange rates.

nostrademons3• 2 years ago

Sure, but this doesn't even modulate inflation. Negative real interest rates = an incentive to take out credit = private sector monetary expansion regardless of what the central bank does. It's a positive feedback loop that doesn't stop until you get real rates positive.

cherryteastain2• 2 years ago

Which is sad because that stability was there for a brief window between ~2005 and 2013.

unsupp0rted3• 2 years ago

Are Turkey's materials competitive in USD/EUR right now, relative to other developing economies?

All the manufacturers have raised their prices significantly in TRY (Turkish Lira) terms- I suspect to the point that their prices are higher than usual even in USD/EUR terms.

Alpha30312• 2 years ago

A leftward shift of LM is still a leftward shift of LM.

cherryteastain2• 2 years ago

Real rates are way below -20% and real inflation is way above 65%. An independent research institute composed of some of the top economists in Turkey, ENAG[1], puts it at over 120%

[1] https://enagrup.org/?hl=en

marcosdumay• 2 years ago

Well, what actually matters is the future inflation, not the past one.

So this is a complicated calculation about how bankers expect people to react to the change in the next few days.

KolmogorovComp• 2 years ago

That’s assuming salaries follow inflation, a big hypothesis.

unsupp0rted3• 2 years ago

As of the start of this year, minimum wage in Turkey is ahead of inflation.

In other words, workers at minimum wage are making more in dollar terms today than they made in dollar terms in previous years.

bwanab• 2 years ago

Unfortunately, it seems their president wasn't aware of the connection either: https://www.reuters.com/world/middle-east/erdogan-says-inter....

tim3332• 2 years ago

I think he's aware of the idea but argues aggressively against it. Apparently God will sort it all out.

anonporridge• 2 years ago

Depending on your politics, spreading this understanding might have negative implications for the upcoming US election. https://fred.stlouisfed.org/series/MEHOINUSA672N

aeyes2• 2 years ago

M2 increased 65% YoY, maybe the should cut public spending to reduce their deficit and stop the money printer instead...

Or better: Close the central bank because politicians abuse it to spend money they don't have.

AlexandrB• 2 years ago

What does M2 have to do with public spending? Most of that money was created by private banks with private loans.

Edit: It's also a little hard to stop spending money when you're dealing with the fallout of this: https://en.wikipedia.org/wiki/2023_Turkey–Syria_earthquakes

The confirmed death toll stood at 59,259: 50,783 in Turkey and 8,476 in Syria. It is the deadliest earthquake in what is now present-day Turkey since the 526 Antioch earthquake and the deadliest natural disaster in its modern history.

qwebfdzsh• 2 years ago

the deadliest natural disaster in its modern history.

Wasn't the 2004 tsunami deadlier?

nvm0n23• 2 years ago

It has a multiplier effect. Government wants to spend money without raising it in taxes, forces the central bank to "loan" it money which it does via "printing" (increasing the balance of the govt at the CB accounts). The government spends the money on salaries and pensions which is then deposited into banks, which use those deposits to justify even more lending.

mrtksn3• 2 years ago

Turkey is odd, everyone over 40 has retired and everyone below 30 is a student. About %8 of the whole population is enrolled in a higher education institution.

The labor participation rate is among the lowest, although increasing. Many of the students and retirees are in employment as the life became harder, also the women who traditionally used to be housewives are getting close to western levels of employment.

The “everyone above 40 is retired” is not exaggerated, it’s due to some populist policies in The 90s but it spilled over once again last year when Erdoğan caved and granted right for retirement after 20 years of working(many people have retired at 38, 18 + 20).

Turkey is in a deep trouble and the central bank won’t be able to do much.

On the other hand, its location is very favorable and the Turkish politicians are masters of milking it. Also, the population is still young and being close to EU and even a candidate state with deeply integrated economy, Turkey has a great potential to actually make this system sustainable.

Also, the country is an engineering powerhouse as you might have noticed with its drones and other weapons and multiple tech Unicorns.

But at the same time its politics have become more and more Islamic as the population becomes more and more secular.

So yeah, overall Turkey is a weird place. Lots of troubles and lots of opportunities and IMHO not easy to explain with western mental models.

However, as a someone who lived in Turkey on and off, I can tell you that the country’s life quality has been deteriorating steadily and quickly for the last 10 years without a break. 90s Eastern Europe vibes.

JumpCrisscross2• 2 years ago

as the population becomes more and more secular

Source? (Not contesting. Just curious.)

floxy• 2 years ago

"everyone above 40 is retired"

...does that mean that everyone over 40 gets a government check every month? How much is that payment (relative to say the minimum wage)? Presumably those payments not indexed to inflation? So after a couple of years of 100% real inflation, you'd need to get a job anyway?

cpursley• 2 years ago

This is basically what president Milei of Argentina has promised to do.

pjc503• 2 years ago

Some people were arguing about bank-created money, so I went and looked up M1, and .. yeah. https://www.statista.com/statistics/1389407/turkey-money-sup...

This is a classic Zimbabwe-style money printing disaster. The other cause of inflation - devaluation against the dollar caused by weak trade - doesn't help, but the government money printing is really making it worse.

https://www.euronews.com/2022/11/09/everything-is-overheatin...

(not all inflation is money printing; analysis applies to Turkey here and should not be generalized blindly)

throw0101d2• 2 years ago

This is a classic Zimbabwe-style money printing disaster.

Have you ever asked why Zimbabwe started printing money in the first place?

* https://www.huffpost.com/entry/another-look-at-the-zimba_b_7...

* https://clintballinger.com/2020/04/30/airplane-crashes-arent...

throw0101d2• 2 years ago

M2 increased 65% YoY, maybe the should cut public spending to reduce their deficit and stop the money printer instead...

It's always interesting that people talk about money supply/printing as the cause of inflation, but don't go one step further as to the cause of the 'money printing' as well.

* https://www.pragcap.com/hyperinflation-its-more-than-just-a-...

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102

* https://www.pragcap.com/understanding-hyperinflation/

Japan has had a constantly expanding M2, and yet its inflation rate has not only been low, but negative on more than one occasion:

* https://fred.stlouisfed.org/graph/?g=PA7P

aeyes2• 2 years ago

I did. One of the primary causes of inflation is running a deficit for decades which is financed by the money printer.

As a consequence, the demand for Turkish debt is decreasing because it is getting riskier and riskier. And with this the value of the lira is going down because there is lower and lower genuine demand for the currency. And when the value of the currency goes towards 0, the prices are going towards: infinity.

Why do you think the government is trying to stop dollarization? Nobody wants lira.

Japan is an outlier and I wouldn't cite it as a general example because it is the only example. But there are hundreds of examples of inflation caused by expanding money supply.

nvm0n23• 2 years ago

Inflation rates as quoted by governments aren't always informative because they tend to exclude many prices that are the most affected by money printing e.g. equities.

TacticalCoder• 2 years ago

Think about the evil Turkish people who managed to exchange their toilet paper of a currency for Bitcoin or who did manage to acquire the barbarous relic that gold is: how scammed they've been!

Meanwhile the US went from 33 to 34 trillion in 100 days. Probably at 35 trillion now.

pjc503• 2 years ago

Turks who managed to secure dollars are also doing pretty well.

wackget• 2 years ago

I have no idea how inflation works - what happens if you're an average Turkish person who had, say, 1000 lira in their bank account 10 years ago?

If that 1000 lira used to be able to buy you 100 meals at 10 lira each, and now the same meal costs 100 lira, have you effectively just become 10x poorer over the past 10 years?

Does the government or your bank offer you higher savings interest on that lira as inflation rises?

philomath_mn• 2 years ago

Assuming the 10 year inflation rate came out to 1000% (or 26% annually) then your meal math would be correct.

As for the bank, it really depends on the accounts and products they offer. I'd imagine a Turkish bond would offer a rate of return (in lira) somewhat correlated to their central bank target rate (now 45%), but a typical savings account will always be some spread lower than that.

So, assuming constant rates for simplicity, if you got a generous 5% return on your savings account, then, after 10 years, your 1000 lira from 2014 would be worth 1000*(1.05)^10 = 1628.89 in 2024 lira. Unfortunately, those 1628.89 in 2024 lira is only worth 1628.89 / (1.26)^10 = 161.50 in 2014 lira.

The real picture is more complicated (rates go up and down, inflation in one area will be different than another and there are different ways to measure) but that is the general idea.

ta12435• 2 years ago

What people fail to appreciate is the different value of work. If you do a week's work in 1900 and make one dohicky, you get paid 100 pieces of gold and spend 50 on bed and board and save the rest

Is it fair to think that your work in 1900 for making one dohicky should be able to buy you two week's bed and board in 2000, where a new worker can make 50 dohickys instead of your one.

Get rid of inflation and you are valuing work done in the past at least as much, and probably more, than work done today, and that's stealing from today.

thriftwy• 2 years ago

They should totally consult the talented Turkuc woman Elvira Nabiullina since it is obvious they do not know what they are doing.

myth_drannon• 2 years ago

The only talented human in Turkey is Erdogan, no one else can even come close to his brilliance. /s

xyzzy47472• 2 years ago

Have they considered cutting public spending instead of printing money into a hyper-inflation spiral?

simplicio• 2 years ago

Isn't increasing interest rates the opposite of printing money?

xyzzy47472• 2 years ago

Seems more like a response to printing money to try to contain the issue.

aranelsurion2• 2 years ago

Cutting public spending will be difficult now since Turkey has already made a large part of their citizenry essentially dependent on government money either directly or indirectly, and cutting on that further would essentially doom large groups of people further under poverty line and into starvation.

Not to mention a recent earthquake caused massive damage in the eastern regions, and it will probably take years to rebuild and recover completely.

This is not to say that Turkey doesn't have frivolous public spending, it's more like the hole they've dug is so deep, that probably hardly matters at this point.

d_burfoot2• 2 years ago

Looking back on prior eras of human history, we wonder why people accepted that the state should have the power to make gross infringements on their basic human rights, like freedom of religion, freedom of speech, and so on. In the future, humans will look back on our era and wonder why we accepted the idea that governments should have so much power to interfere with the economy.

A stable currency is a basic human right.

solardev• 2 years ago

(deleted my previous comment)

ta12435• 2 years ago

Or people will look back and wonder why they weren't protected by their government as "the economy" failed to deliver time and time again.

Not every culture shares your libertarian fantasies. Nor do they share your specific limits on free speech (such as copyright) or your disdain for their limits (such as limit on hate speech)

graphe4• 2 years ago

Why would topics he mentioned such as "freedom of religion, freedom of speech, and so on" need to be trampled to "protect" it's people/economy from "libertarianism". Which culture hates those things?

quonn• 2 years ago

A currency is a tool, not a store for wealth. Stability is to be balanced against employment and economic productivity.

pjc503• 2 years ago

You can't inflation-proof purchasing power against price rises, and trying to ration out a truly fixed money supply against a growing economy creates other problems. But Turkey really has just chosen a disastrous path through Erdogan and his poor economic understanding.

(not unusual, of course, we got a tiny blip of this in the UK during the brief reign of Liz Truss, but the electorate are willing to punish that and do not prioritize culture war over economic stability. Yet.)

nvm0n23• 2 years ago

It doesn't really cause problems. Academic economists claim deflation is destructive, but it's a misanalysis caused by extrapolating from a tiny number of samples and ignoring all the counter evidence.

If you have a fixed monetary base and the economy grows, all that happens is that things get cheaper, which is what you'd intuitively expect if a society gets wealthier. Economists claim that this will trigger hoarding cycles but this is a strange almost pseudo-psychological claim. It doesn't happen in reality, where there are many examples of prices falling continuously over time in a sector without it causing recession within that sector.

addicted2• 2 years ago

A stable currency is a basic human right.

This is just a complete misunderstanding of what a currency is.

guidoism• 2 years ago

Indeed.

Additionally I’m sick of people using “human right” to describe every conceivable characteristic of an ideal modern society.

Some things should be basic and a minimum and other characteristics should be add-ons you get for advancing civilization.

Pooling them all together waters down the most important ones.

d_burfoot2• 2 years ago

All rights are phrased in terms of nebulous concepts such as "religion", "speech", or "arms".

But more importantly, my statement is not about external facts. It's a statement of who I am willing to ally with and befriend. Any person who substantially agrees with me about what rights must be protected is my friend and ally. Any person who substantially disagrees is at best a neutral bystander (if he does not try to interfere with my rights) and at worst a bitter enemy (if he actively tries to suppress my rights).

graphe4• 2 years ago

How will this affect Turkish steam gift cards?

AlexeyBelov• 2 years ago

Asking the most important questions.

CSDude• 2 years ago

Reall inflation is much higher than 65%. A lunch takes 250 TL which we used to 100-120 TL almost 1 year ago.

Turkey hikes interest rate again to 45% after inflation nears 65%

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